After Hours

Well it's a bit ironic that today BAC and the $5.00 line in the sand were mentioned. I saw ES after hours dump and wondered what was going on, unfortunately before I could find out I took my Vizsla puppy to the dog park. Upon returning, I saw the downgrade of major banks by S&P and in after hours, BA is fighting to hold $5.00.

ES is below today's intraday lows right now.

Notably ES took out today's intraday lows and is finding some support from Monday's support level that was breached and saw a late day rally to recover above it, this s a key short term support level.

Interestingly, Treasuries (which usually trade inversely to the market and are a safe haven trade against an equity market decline) performed better today (not as well as yesterday) then their correlations would imply, suggesting that smart money is using this opportunity of the last 2 days to move in to the safety of treasuries.

 Since TLT's bull flag, TLT has rallied higher, it has pulled back as it should on the market bounce, but the two day closing price pattern in the Japanese candlesticks is called a Harami reversal, and a nearly perfect example of one. In this position, the Harami reversal suggests an upside reversal and would count the last few days as a minor pullback within the trend, this would have negative implications for the equity market.

 nce again, today's intraday trade saw TLT-Treasuries rally from 11 a.m. through 2 p.m. and much sharper then the implied correlation.

The 5 min 3C chart remains bullish and even went to a leading positive divergence at the afternoon rally highs, no negative divergence, but a leading positive confirmation.

In contrast...

 The SPY daily closing candles are a star yesterday and a more potent Doji star today, both signal a loss of upside momentum and open the market to a reversal. You almost always see these kind of candles before any trend reversal.

 The DIA closed with two star candles, both signal a lack of momentum. A healthy rally/bounce should have a long bodied candle, such as what is seen at the start of the October rally/October lows.

 The NASDAQ actually gapped up and gave up all of the gains to close down nearly .60%, so not only are we seeing very weak trade, but now the averages are decoupling as tech underperforms badly. The S&P is likely only held up by energy stocks within the average, financials certainly aren't helping.

 XLF posted a bearish "hanging man" candle yesterday and closed lower today, again by nearly .60%. Even the S&P close was a paltry +.27%

 Here's a look at 3C over the last two days in financials (XLF), several negative divergences and now a leading negative divergence.

 The more important 15 min chart is in a deep leading negative divergence as price was at the relative  11/21 levels.

 The hourly chart though really shows the extent of the damage in financials.

Here's 3C over the last two days in Technology, now leading negative and the obvious reason for the NASDAQ 100's underperformance relative to its peers.

Back to the event of the night, the S&P downgrade of major American Financials...

S&P reviewed 37 of the largest banks and financial institutions, BAC for example was cut from A to A-

The full list of downgrades which includes subsidiaries is so large that I think few members would be interested in reading the entire document.

Here's a link to Forbes that covers the story.

Among the majors downgraded: Bank of America, Goldman Sachs, Citi, Morgan Stanley, Wells Fargo, JPM Chase, Bank of New York Mellon, Barclay's (another on our short list), HSBC, Lloyds, Royal Bank of Scotland (recall earlier today that Goldman's Sigma X showed several of these banks trading down substantially-leaked information I'm sure),  UBS  and this is just the start.

As this Forbes article makes clear, more are on the way

Here's the full list in PDF format for those interested, but I think we were right on target in transitioning from directional trades to stock picking and starting with the financial sector, clearly today's rating action vindicates the view 3C has been showing toward financials.

As far as I can tell, most downgrades were 1 notch, however subsidiaries of each bank were considered separately under S&P's new November ratings guidelines. It seems every BAC subsidiary was downgraded by 1 notch, from a quick look, the same was applied to Citi's multiple subsidiaries, I assume the theme is the same for most of the majors that were downgraded.

Again from a quick browse, banks all over the world were hit including South America, Australia and New Zealand. In some cases it seems some banks were left unchanged, but subsidiaries were downgraded. Several high profile European banks remained unchanged.

What really stood out was the number of major US banks that were downgraded.

The practical effect of the downgrades is not just equity valuations, these banks that are already struggling with weak economies and the accelerating pace of the EU's crisis may have to post billions of dollars of collateral and termination payments, adverse liquidity effects, potential loss of access to credit markets, higher costs of borrowing, and counter-party credit problems with regard to trades and interbank liquidity. So this isn't just a simple downgrade, the downstream effects could tip an already fragile banking sector over the edge and the new Dodd-Frank regulations make financial institution bailouts that much more difficult. Again, we are at the edge of the second shoe dropping, but in far worse condition to deal with the fall out.

A few real world examples:

Morgan Stanley estimated over-the-counter derivatives counterparties could demand $1.29 billion of collateral or termination payments from the New York-based firm after a one- notch downgrade. In addition, the firm may have to post an additional $323 million to exchanges and clearinghouses. All the estimates were as of Sept. 30.

JPMorgan, the largest and most profitable U.S. lender (BKX), has said the New York-based company may have to post an extra $1.5 billion in collateral against its derivatives and pay additional sums for contract terminations after a one-notch cut. 

In retrospect, it's little wonder that the  credit/risk assets indicators remained so weak over the last two days.

Didn't Add Today

I didn't add today, I'm leaving the option open in case we get higher prices.

The credit indicators and risk basket with the exception of commodities which seems to be up on crude/mid-east tensions today, remain weak.

 The market is still trading well above the Euro correlation providing a dislocation that should revert back to the mean or even overshoot on the downside.

 High Yield Credit is what I am mainly interested in and it has been trending lower since yesterday, despite the S&P creating a divergence/dislocation.

 This is the XLF compared to the S&P-it is not the momentum indicator, clearly financials are struggling as they have not been able to surpass yesterday's opening highs, while the S&P which has significant financial exposure has broken above yesterday's opening highs.


Rates are also key, the market gravitates toward them so the downtrend of the last two days is encouraging for adding shorts in a market that is clearly dislocated and seemingly becoming more so.

Mid-East Tensions

I won't run down the entire list, but recently they have flared including today's hostage taking in Tehran of UK diplomats and the embassy being set on fire as well as rocket attacks last night in Israel and of course the shady event of 2 explosions at Iranian missile facilities, one is where part of their nuclear program is based.

Events in the middle east are becoming very unpredictable, which makes energy unpredictable. I ALWAY want to trade with an edge, not guessing or hoping and the middle east is not offering much of an edge.

Furthermore, I do NOT like the look of late afternoon USO trade.

 This very flat trade is unusual and I don't like it.

I'll give USO/Energy a little more space and see how the Tehran situation is resolved, but if USO breaks north of the recent top, I'm out of energy.

PEIX Follow Up

A lot of members made good money using the crossover screen and buying the first pullback to the 10-day moving average. I warned not to buy the second pullback to the 10-day, but let it pullback deeper between the 10 and 22 or to the 22 as this is often the case (the first pullback to the 10-day the second to the 22 day).

The long signal remains, but the pullback, as expected, is deeper then the yellow 10-day m.a.

This probably means that buying opportunity will pop up soon, I don't think we are quite there yet.

There are some signs on the 5-10 minute 3C charts that accumulation has started so I would give it another day or two and see if we can't get a low risk/high probability entry for another leg up (the last one was good for 165+% and intraday, closer to 200%!

Patience.

Put BAC on your Watchlist

 From 2007-2009 BAC fell more then 90%. Notice even during the melt up of QE2 in 2010 and early 2011, BAC couldn't get off its back. Throw in the fact they are trying to raise capital, Warren Buffet threw $5 billion there way a day after speaking to Obama about "advice on the economy", the 50 biggest hedge funds hold BAC and still can't support price, recent price action including today's failure to participate and what we may be looking at is a sub $5.00 nightmare in the form of a TBTF doing exactly that.

 Here's October support at $5.13 being taken out, volume isn't all that high on the break considering.

 Here's the intraday break and note that while the market is at least close to neutral, BAC is down significantly.

 The hourly chart is in line with the downtrend.

As is the 30 min.

I'd like to see a bounce and a good 3C signal, absent that, I would have alerts set to a break of $5.00 where stops should be piled up. If those hedge funds end up having to sell BAC on a break of $5.00, BA is going to be in a world of trouble, far worse then what they are already in. Make sure BAC is on your watchlist.

Fitch Ratings Telegraphing UK Contagion

• FITCH: UK GOVT MAY BE MOST INDEBTED OF AAA SOVEREIGNS EX U.S. -BBG
• FITCH: NEW UK FISCAL VIEWS 'SIGNIFICANT DETERIORATION' VS MARCH - BBG
• And the punchline: "the capacity of UK public finances to absorb adverse economic and financial shocks that would result in yet higher public debt while retaining its 'AAA' status has largely been exhausted"

Fact:

The UK has the Greatest combined debt (Government, Corporate and Household) to GDP of any other nation.

While we rarely get to see what's going on in the dark pool trading centers, we do get a peak today and it seems to confirm that smart money is betting against the UK.

Goldman's Dark Pool, Sigma X most actively traded issues. Note Lloyds, RBS and HSBC.

On a personal note, when will the SEC finally do their job and get rid of dark pool trading?

KCG follow up/Trade

While I'm updating financial shorts in the model portfolio, here's KCG.

 This looks very much like a top after a very brief move up, there appear to be two levels of support that I'll be watching, but this is already a short position in the portfolio from when it was first covered.

 The custom crossover screen did a great job weeding out false crosses and the middle custom indicator kept KCG long until the red squares. This is why I NEVER use a crossover system without this screen as false crosses are too many.

 The Trend Channel also was broken (up trend broken) around the same time as the chart above.

 The 30 min chart shows the top which note has a parabolic spike, I watch for these as signals of a trend change, right now the 30 min is leading negative, that's pretty serious. Of course this too is a financial.

 On the recent bounce, the 5 min chart identified the top and note there was another parabolic spike in the area, currently this 3C chart is leading negative as well.

 The 1 min chart didn't even bother trying to confirm, thus a very weak bounce and the kind I prefer to short as price strength gives you an opportunity and the underlying weakness confirms the probabilities of that opportunity.

 Using the Trend Channel as a way to uncover the top on an intraday chart worked well also.

Like JEF, I'll be paying attention to price around the last ditch support levels, should they be broken as I imagine they will be, KCG should see a wave of stops hit and a pretty fast fall.

I think KCG is worth a look as a short position even today.

JEF Update

The last several months, because of the market chop,we have been trading using ETFs in directional market trades and not stock picking, but a few weeks ago I said as a trend starts to develop and sector rotation begins again, we'll be looking at specific stock ideas and the first place we will be looking is in the financial sector.

One of the first short trade calls was last week on JEF (Jefferies) and it is in the model portfolio as a short.

 This was certainly a great place to short it and as far as candlestick analysis goes, this is a perfect Harami reversal.

 This is where I started entering JEF last week as the long lower wicks indicated a bounce and the long upper wicks (red) indicated that higher prices were being rejected and JEF was losing momentum, that has culminated in two ugly topping candles and JEF still looks like a good short entry right here.


 Short term 3C shows distribution as JEF rolls over, the negative divergence or distribution of the bounce you can see was around the same time we saw the candles in the chart above with the long upper wicks.

 The 5 min chart is leading negative and this appears to have been nothing more then a counter trend bounce, which makes it an attractive area to consider shorting the brief price strength.

 The 10 min chart is very ugly as well.

 However the 15 min chart really tells the story of the longer term weakness in JEF.

My only concern and the place where I will be watchful is at the long hammer day at the start of November which offers support, that's where the most recent bounce started. A break of that level will be significant and likely lead JEF down very quickly as stops are more then likely lined up right along the $10 area and support, once they are hit, the downside could be fast and deep. For me, it's a trade worth taking as I have.

Market Update

So far High Yield, Financials, Rates (especially), and the Euro correlation are all still underperforming the market. Only commodities have aught up and that seems to be specifically due to the 1.56% gain in crude due to the Iranian/British diplomat hostage crisis that erupted today.

The SPY is VERY close to filling the gap that we had been watching last week for a bounce.

What's left of the gap is in yellow on this daily chart.

 The SPY deteriorated as sen earlier and as I just mentioned, hit some support and got a brief lift off that support on the 1 min chart you can see the area in white.

 Here's a closer view of the same chart.

 The 2 min chart remains unaffected by the support level and continues to fall in what is now a very sharp leading negative divergence between the two relative price points of 11/22 and currently which is actually higher.

 The 5 min chart also is looking pretty bad on this bounce.

 The 10 min chart really tells he story though and I'm glad I added shorts yesterday, if we get some strength I may add more today, I've just been too busy to do that thus far.

 The DIA 1 min did show the bounce, the same as the SPY, but since has taken to a the start of a leading negative stance.

 The 2 min chart looks pretty bad here and appears to be pretty much what I thought yesterday, a fluff bounce that is a good opportunity to look at adding to existing short positions or new ones.

 The 5 min chart looks very bad as well. The gains in the SPY/DIA today are paltry.

Moving to the QQQ, the average is down around -.70% so it is underperforming the S&P by a pretty wide margin.

 The short term QQQ 3c chart is in line with the move down.

The 5 min chart looks extraordinarily bad with a sharp leading negative divergence.